NEW YORK (Reuters) - The
dollar stayed firm on Friday as U.S. bond yields held
steady, while sterling slipped from its recent peaks
tied to expectations the Bank of England might raise
interest rates by early 2015 on signs of a strengthening
British economy.

Reduced jitters about the fighting in Iraq also supported the dollar
as traders trimmed their safe-haven holdings in gold, U.S.
Treasuries and Japanese yen.

"The dollar has drifted in a pretty small range," said Omer Esiner,
chief market strategist at Commonwealth Foreign Exchange Inc. in
Washington.

The dollar index .DXY clung to a slim 0.07 percent gain at 80.39,
shaving its weekly loss to 0.2 percent, still on track for its
biggest one-week drop since the week ended May 2.

The benchmark 10-year Treasuries yield US10YT=RR rose to 2.66
percent before easing to 2.63 percent in late U.S. trading, little
changed on the day. The 10-year yield has bounced in a 10 basis
point range established two weeks ago.

Analysts said the greenback's move was limited by light trading
volume and the absence of fresh U.S. economic data.

"Until we get a surprise on the geopolitical front, most major
currencies will be tracking bond yields in the near term," Esiner
said.

The dollar index was poised for its worst week since early May after
the Federal Reserve downgraded its long-term U.S. growth outlook and
markets perceived comments by Fed Chair Janet Yellen as dovish.

The U.S. currency was last up 0.2 percent against the yen at 102.13
yen JPY=, while the euro dipped 0.1 percent to $1.3593 EUR=.

The gap between U.S. and German 10-year yields narrowed to 1.276
percentage points from 1.296 on Thursday, which was its widest since
mid-1999, shortly after the euro debuted.

Sterling hovered within striking distance of Thursday's 5-1/2-year
high of $1.7064 GBP=D4 after data showed U.K. factory orders grew at
their fastest pace in six months in June. The report highlighted the
probability that the BoE may raise rates well before the Fed.

"Sterling is a favorite right now, and the BoE seems to be the only
major central bank that is likely to deliver on higher rates," said
Niels Christensen, an FX strategist at Nordea in London.

Analysts projected the BoE will likely raise policy rates in the
first quarter of 2015 while the Fed will follow suit in the second
half of next year.

This view raised the yield premium on two-year British Gilts
GB2YT=RR over two-year U.S. Treasuries US2YT=RR to 0.44 percent, a
level not seen since August 2011.

The pound dipped 0.2 percent versus the dollar to $1.7008 and also
eased versus the euro EURGBP=D4, which was trading at 79.92 pence.

(Additional reporting by Anirban Nag in London and; Shinichi
Saoshiro in Tokyo; Editing by Andrea Ricci)